In 1924, The Massachusetts Investors trust, or what is now called MFS Investment management, founded a mutual fund that allows people, anyone, to invest in that fund, because at the time mutual funds were exclusively for the wealthy people. This was the beginning of a surge of mutual funds that are open to the public. A few years later, particularly in 1949, Alfred W, Jones started a new way of investment, the hedge fund. Although the term mutual funds is more popular, doubtless because of its easy-to-access policy, which enables people with as few as $500 to invest, hedge funds are only popular in the elite, people or companies that invest a great deal of money, no less than $1 million. In fact, there are several distinctive differences between mutual and hedge funds.
First, the regulations and the extent of leverage play an important and essential role in distinguishing the hedge funds from the mutual ones. Every mutual fund should be registered with Securities and Exchange Commission (SEC). Thus, this kind of fund abides the rules of SEC, such as the limitation of short-selling. Also, the performance of the markets and their equity affects mutual funds’ performance. On the other hand, hedge funds are completely private; they are not registered with the SEC and they do not depend on the markets equity which means that the hedge funds can perform very well even when the markets are in a bad situation.
Second, how much money can be invested and how the managers get paid evidently set mutual and hedge funds apart. In mutual funds, an investor can start with $5,000 as a minimum, but in the hedge funds $1 million is indispensable to start investing. In addition, a hedge fund investor has to be accredited in order to invest while this kind of accreditation is not a must for a mutual fund investor. Moreover, a mutual fund’s manager is paid a regular salary or a certain percent of the fund, but a hedge fund’s manager’s payment depends on how well he or she performs plus a fixed fee.
Furthermore, what seems to be a boon for one side is a drawback for the other. For example, mutual funds can advertise with no restrictions while hedge funds cannot. This prejudices towards the mutual fund’s side. Another example, mutual funds have to report their activities and be as much transparent as possible whereas hedge funds do not have to report anything. This counts, for the most part, as an advantage to hedge funds. All these differentiations explain why mutual funds gain in popularity more than hedge funds.
